Volkswagen’s New U.S. Trajectory?

Let the Brand Remain Niche, and Pour Resources into Audi

Volkswagen still hasn’t revealed the name of its new mid-size SUV, the long overdue Honda Pilot competitor scheduled to go on sale in the second quarter of 2017. That launch will come four years after the automaker unveiled a concept version at the North American International Auto Show. So far, all VW will say officially is that U.S. management will be in charge of coming up with the name. It won’t sound like “Touareg,” “Tiguan,” or “Passat.”

May I suggest calling it “Beetle”?

Road test editor Eric Weiner, who just returned from a quick drive of the midsize VW SUV prototype in Chattanooga, Tennessee, didn’t see much humor in my proposal, either. Volkswagen is, of course, still trying to match sales for its best year ever in America, calendar year 1970, when it sold 582,573 cars and buses here, most of them Type 1 Beetles.

When the U.S.-specific VW Passat launched in late 2011, Volkswagen of America was working toward a goal of selling 800,000 units in the country by 2018. But even before Dieselgate, VW had begun to quietly back away from that goal, which sought to conquer Nissan, Honda, and Toyota customers. With annual U.S. sales of between 1.3 million for the Nissan brand (exclusive of Infiniti) and 2.1 million for the Toyota brand (no Lexus) in ’15, these were good targets for the German company.

VW now aims to target Subaru instead, Eric says, which sold 582,675 cars and crossovers last year, coincidentally passing VW’s best U.S. year ever for the first time by 102 units. Like Subaru, VW won’t be getting into pickup market, which is lucrative, but tough for non-American brands. It would have to assemble pickups in a NAFTA country to avoid President Johnson’s famous “chicken tax,” which forced out its Microbus-based pickups from the U.S. market more than 50 years ago.

Even if Volkswagen cuts prices to better match the Japanese and South Korean competition, it will still have better margins with the new midsize SUV, the (hopefully more competitive) second-generation Tiguan compact SUV, and a growing lineup of models with all-wheel-drive options. Despite a pretty good launch, the 2012 Passat that was supposed to propel VW into the U.S. mainstream failed to make any dent in the tough—and now shrinking—midsize sedan segment, which is no longer that important for smaller automakers.

The U.S.- (and China) specific VW Passat was scheduled for redesign in calendar 2018, when it would switch to VW Group’s uber-flexible MQB platform (Golf, new Tiguan, and new midsize SUV), but that may be delayed to calendar 2020 or 2021, Automotive News reported this week. The delay would realign the U.S. Passat with the smaller European Passat, AN continues, which would make the car what it was before Volkswagen started building it in its new Chattanooga assembly plant: too small and too close in size to the compact Jetta for the U.S. market.

That might actually turn out to be okay. It will work if Volkswagen, coming to the large-midsize three-row SUV segment at least half a decade late, can sell a decent number of them (again, at higher profit margins) and keep the Chattanooga factory chugging.

Meanwhile, AN says that the VW Group – again, that includes VW, Audi, Porsche, Bentley, etc. – will close its North American design center in Santa Monica, California this November, and will open a new design center in Malibu just for the Audi brand. It’s a sign VW management has figured out the advantages of chasing profit margins instead of quantity. Until this year at least, the premium and luxury segments have been outperforming the mass market since The Great Recession.

Audi also is taking the lead at VW Group in developing electrified vehicles, which now have a better future than diesel-powered models. Audis also command premium pricing in Uber’s model, and they’re more desirable for car-sharing young urbanites after status and cushiness. This can’t be a new revelation for VW Group, which sells more VW Golfs in Europe than any other car, but at virtually no profit margin. Across the Atlantic, high-volume Audis like the A3, A4 and Q3, and Skodas built in the former Soviet bloc, are the moneymakers.

When Dieselgate broke almost a year ago, I asked whether Volkswagen is toast in the United States. The answer is no, not exactly. But even as VW negotiates with the feds toward an anticipated October settlement over 3.0-liter turbodiesel emissions cheating, Audi looks to come out of this pretty much unscathed, so it’s the brand that deserves resources and attention. Meanwhile, the VW brand goes forward in this country with its new SUV and the remainder of its lineup that appeals mostly to its longtime fanbase. As Audi continues to set sales records, that would not a terrible place for the VW brand to be – growing without turning off its small, but loyal niche customers. Just like Mazda, which it now barely outsells, and Subaru, which it now envies. Perhaps Volkswagen isn’t too many years away from finally catching its 46-year-old U.S. sales record.